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Managing Rising Labor Costs

Rising Wages in Restaurant Industry

How business savvy restaurateurs are turning a profit in the highly competitive food service industry  

The economy as a whole has been undergoing a massive shift due to the widespread adoption of technology and automation. The restaurant industry is no different. The reshaping of our modern day economy has created a huge deficit in the workforce of the food service industry. The shortage of workers along with an increasing minimum wage, has created a costly dilemma for restaurant owners.

Cost of Business

The labor costs in the restaurant business can vary depending on the nature of the locale. When operating a fast food style restaurant, one can expect a margin of 25% on labor costs of total revenue. On the other hand, fine dining and table service restaurants typically operate with a margin of 30-40% on labor costs of total revenue.

Restaurant owners are obliged to get creative with their resources in order to keep labor costs down and gross profits up. The last resort of cost cutting in the restaurant business is to pass on the rising costs back on to the consumer; this, can alienate your loyal clientele and negatively impact overall sales. And, it is much harder to push on other substantive operating costs, such as lease costs, as prime locations usually have a waiting list of people behind the current tenant, who are more than willing to pay the rate.

Help Wanted

The process of hiring new staff is costly and time consuming. It involves vetting, interviewing, training, and managing personnel on the job along with all of the other unexpected contingencies. Thorough training and scheduling of staff can help workers maximize their productivity on the job and minimize unnecessary costs such as overtime pay.

Although the federal minimum wage has plateaued at $7.25 since 1991, some states have successfully pushed for higher wages, such as in the state of California, where the minimum wage is currently set at $12 an hour. At the state and federal level, there is the ever-present, looming push for higher minimum wage hikes, which is another pressure point to the bottom line for restaurant owners. Time will tell how operators will handle the inevitable rise in wages for hospitality workers, but we suspect, that particularly in the lower priced point concepts, automation will continue to take on repetitive and mundane tasks to attempt to keep overhead down.  The payback period on a $10,000 piece of equipment can easily be less than one year and much less in a rising wage environment.

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Effects of $15 Minimum Wage on the Restaurant Industry

Restaurant wages

The raising minimum wage rate has had a major impact on many service industries across the country, and restaurants are no exception. The topic is a political hot potato, and it’s one that has been tossed around for many years now.

Advocates for a higher minimum wage promise a more productive and healthy workforce that is motivated to perform. Opponents say a lower minimum wage lets entry-level and young workers gain experience and that raising it will hurt businesses.

Those who are for increasing minimum wage rates argue that anything less than $15 an hour is not a livable wage. They claim workers earning less will have to take government subsidies just to survive. But, opponents take on a different stance, pointing out that forcing a business to pay more doesn’t just make more money appear in their budget. This means a higher minimum wage could force a business to hire fewer people and have them work less hours.

This brings up the important point that, oftentimes, it’s not about a business’ unwillingness to pay workers more—it’s a financial inability to do so. In these situations, a higher minimum wage will only harm small, medium, and local businesses. That will end up hurting communities in other ways, even though advocates for a higher minimum wage have helping communities and workers as their primary focus.

Regardless, we are not here to debate the pros and cons. The purpose of this article is to help you understand how a higher minimum wage requirement can effect your restaurant’s operations. Whether or not such a law is in effect in your area yet or not, it is already active in many places and on the horizon in many others. That means preparing for it is important.

One consideration that both sides need to make is that machines are capable (and already in the process of) taking many entry-level jobs away from humans. In the restaurant industry, automation is already taking away jobs with self-serve kiosks in QRS (Quick Service Restaurants).

It is reasonably believed that upping minimum wage requirements will only further encourage restaurants to pursue the implementation of such automation. Data is still murky as far as automation’s impact on the industry, but as the economic cycle rounds to an end, cause and effect will begin to become clearer.

Another potential impact of an increased minimum wage rate is an overall lower number of restaurants. Currently, there is an abundance of marginally profitable chains operating in the industry. Low interest rates and financial engineering are currently keeping them alive. For two decades, the restaurant industry has been on an unprecedented run—and it’s due for a reset. Increasing cost pressure will have a big impact in this regard.

Finally, the elimination of tipping is another thing to look to on the horizon. For instance, many restaurants now default to a 20% service fee divided amongst all staff. Advocates of this movement claim that all back-of-house and front-of-house staff contribute to increasing sales, so they will all perform better with increased per-ticket sales.

These are just a few of the changes we expect to see.  We will follow up in a few years and see how accurate and transferable these items are to other cities and states that adopt an increase in the minimum wage.